Question 1

Joseph and Sandra,married taxpayers,took out a mortgage on their home for $350,000 15 years ago.In May of this year,when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage,they took out a home equity loan for $220,000.They used the funds to purchase a single engine airplane to be used for recreational travel purposes.What is the maximum amount of debt on which they can deduct home equity interest?

Accepted Answer

Interest is deductible only on the portion of the $220,000 home equity loan that does not exceed the lesser of:
-The fair market value of the residence,reduced by the acquisition indebtedness ($450,000 FMV - $250,000 acquisition indebtedness = $200,000).
-$100,000 ($50,000 for married persons filing separate returns).
Of the $220,000 home equity loan,interest on $100,000 is deductible as home equity interest.

Question 2

Brad,who would otherwise qualify as Faye's dependent,had gross income of $9,000 during the year.Faye,who had AGI of $120,000,paid the following medical expenses in 2014:

Accepted Answer

The answer of Brad,who would otherwise qualify as Faye's dependent,had...

Question 3

Your friend Scotty informs you that he received a "tax­free" reimbursement in 2014 of some medical expenses he paid in 2013.Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income?

Accepted Answer

If Scotty did not itemize in 2013,he can exclude the reimbursement from gross income in 2014.If Scotty itemized deductions in 2013,he must report the reimbursement as gross income in 2014 to the extent he received a tax benefit from deducting medical expenses in 2013.Whether he itemized in 2014 will have no impact on the treatment of the reimbursement.

Question 4

Rick and Carol Ryan,married taxpayers,took out a mortgage of $160,000 when purchasing their home ten years ago.In October of the current year,when the home had a fair market value of $200,000 and they owed $125,000 on the mortgage,the Ryans took out a home equity loan for $110,000.They used the funds to purchase a sailboat to be used for recreational purposes.The sailboat does not qualify as a residence.What is the maximum amount of debt on which the Ryans can deduct home equity interest?

Accepted Answer

Interest is deductible only on the portion of a home equity loan that does not exceed the lesser of:
-The fair market value of the residence,reduced by the acquisition indebtedness ($200,000 FMV - $125,000 acquisition indebtedness = $75,000).
-$100,000 ($50,000 for married persons filing separate returns).
On a joint return,Rick and Carol can deduct all of the interest on the first mortgage since it is acquisition indebtedness.Of the $110,000 home equity loan,interest on $75,000 is deductible as home equity interest.

Question 5

Tom,age 48,is advised by his family physician that he needs back surgery to correct a problem from his last back surgery.Since Tom is in a wheel chair,he needs his wife,Jean,to accompany him on his trip to Rochester,Minnesota,for in-patient treatment at the Mayo Clinic,which specializes in this type of surgery.Tom incurred the following costs in 2014:  Compute Tom's medical expenses for the trip (subject to the 10% floor).

Accepted Answer

Tom's medical expense deduction for transportation is $700,and his medical expense deduction for lodging for Jean is $200 ($50 per night per person maximum).Tom is not allowed a deduction for the cost of Jean's meals while in Rochester.His medical treatment and prescriptions are deductible.So his total deduction (before the 10% floor)is $5,000 ($700 + $200 + $3,500 + $600).

Question 6

Pedro's child attends a school operated by the church the family attends.Pedro made a donation of $1,000 to the church in lieu of the normal registration fee of $200.In addition,Pedro paid the regular tuition of $6,000 to the school.Based on this information,what is Pedro's charitable contribution?

Accepted Answer

The taxpayer's donation of $1,000 in lieu of the normal $200 registration fee would be deductible to the extent of $800 [$1,000 - $200 benefit received (the registration fee)].The tuition of $6,000 is a personal expense that cannot be deducted as a charitable contribution.

Question 7

Karen,a calendar year taxpayer,made the following donations to qualified charitable organizations during the year:  The land had been held as an investment and was acquired 4 years ago.Shortly after receipt,the City of Terre
Haute sold the land for $210,000.Karen's AGI is $450,000.The allowable charitable contribution deduction is:

Accepted Answer

$30,000 (cash)+ $135,000 (30% × $450,000 AGI)= $165,000.The capital gain property is limited to 30% of $450,000 AGI,or $135,000.The carryover to the next five years is $75,000 [$210,000 (FMV of the land)- $135,000 (deduction allowed for the current year)].If the reduced deduction election is made,the deduction becomes $100,000 [$30,000 (cash)+ $70,000 (basis of land)].

Question 8

In the current year,Jerry pays $8,000 to become a charter member of Mammoth University's Athletic Council.The membership ensures that Jerry will receive choice seating at all of Mammoth's home basketball games.Also this year,Jerry pays $2,200 (the regular retail price)for season tickets for himself and his wife.For these items,how much qualifies as a charitable contribution?

Accepted Answer

Under the exception to the tangible-benefit-received rule,Jerry can deduct $6,400 (80% of $8,000)of the charter membership to Mammoth University's Athletic Council.The amount Jerry pays ($2,200)to purchase tickets at the regular price is not deductible as a charitable contribution.

Question 9

In 2014,Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family.In addition,he contributes $3,400 to a Health Savings Account.Which of the following statements is true?

Accepted Answer

Boris,who is self-employed,may deduct 100% of the premium ($3,800)as a deduction for AGI.He may also deduct the $3,400 HSA contribution as a deduction for AGI.

Question 10

Zeke made the following donations to qualified charitable organizations during the year:  The used clothing was donated to the Salvation Army;the other items of property were donated to Eastern State University.Both are qualified charitable organizations.Disregarding percentage limitations,Zeke's charitable contribution deduction for the year is:

Accepted Answer

For the used clothing and the ABC stock,fair market value controls in determining the amount of the deduction.The ABC stock was held long term,but it was not appreciated property.The MNO stock would not yield a long-term capital gain if sold because of the holding period.Consequently,it is ordinary income property for charitable contribution purposes and the appreciation cannot be claimed.The real estate meets the definition of capital gain property.Thus,$375 + $10,875 + $15,000 + $30,000 = $56,250.

Question 11

Hannah makes the following charitable donations in the current year:  The HBM stock and the inventory were given to Hannah's church,and the baseball card collection was given to the United Way.Both donees promptly sold the property for the stated fair market value.Disregarding percentage limitations,Hannah's current charitable contribution deduction is:

Accepted Answer

Inventory is ordinary income property,but the fair market value ($7,200)must be used if lower than the basis ($8,000).Stock is intangible property and is not subject to the tangible personalty rules.Since a sale of the HBM stock would have yielded a long-term capital gain,the full fair market value qualifies for the deduction ($40,000).The baseball card collection comes under the tangible personalty exception,and the adjusted basis ($4,000)must be used.Thus,$51,200 may be deducted as a charitable contribution ($7,200 + $40,000 + $4,000 = $51,200).

Question 12

In Lawrence County,the real property tax year is the calendar year.The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year (assume this year is not a leap year).The tax is payable on June 1.On May 1,Reggie sells his house to Dana for $350,000.On June 1,Dana pays the entire real estate tax of $7,950 for the year ending December 31.How much of the property taxes may Reggie deduct?

Accepted Answer

$2,614.Under § 164(d),120/365 (January 1 - April 30)× $7,950 = $2,614 is apportioned to Reggie.

Question 13

During 2014,Hugh,a self-employed individual,paid the following amounts: Real estate tax on Iowa residence $3,800
State income tax 1,700
Real estate taxes on land in Puerto Rico (held as an investment)1,100 Gift tax paid on gift to daughter 1,200
State sales taxes 1,750
State occupational license fee 300
Property tax on value of his automobile (used 100% for business)475
What is the maximum amount Hugh can claim as taxes in itemizing deductions from AGI?

Accepted Answer

State sales taxes ($1,750)are more than the state income tax ($1,700);so Hugh should choose to deduct the sales tax rather than the state income tax (assuming the option is available in 2014).The state occupational license fee ($300)and the tax on his business use auto ($475)are deductible for AGI as business expenses.The state sales tax ($1,750)and the real estate taxes ($3,800 + $1,100)are deductible as itemized deductions.The gift tax is not deductible.The total itemized deductions are $6,650 ($3,800 + $1,100 + $1,750).

Question 14

Phillip,age 66,developed hip problems and was unable to climb the stairs to reach his second-floor bedroom.His physician advised him to add a first-floor bedroom to his home.The cost of constructing the room was $32,000.The increase in the value of the residence as a result of the room addition was determined to be $17,000.In addition,Phillip paid the contractor $5,500 to construct an entrance ramp to his home and $8,500 to widen the hallways to accommodate his wheelchair.Phillip's AGI for 2014 was $100,000.How much of these expenditures can Phillip deduct as a medical expense in 2014?

Accepted Answer

A capital improvement that ordinarily would not have a medical purpose qualifies as a medical expense if it is directly related to prescribed medical care and is deductible to the extent that the expenditure exceeds the increase in value of the related property.Examples of such improvements include dust elimination systems,elevators,and vans specially designed for wheelchair-bound taxpayers.Phillip's medical expense related to the room addition is $15,000 ($32,000 - $17,000).
The full cost of home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense.Qualifying costs include expenditures for constructing entrance and exit ramps to the residence,widening hallways and doorways to accommodate wheelchairs,installing support bars and railings in bathrooms and other rooms,and adjusting electrical outlets and fixtures.These expenditures are subject to the AGI floor only,and the increase in the home's value is deemed to be zero.The 7.5% AGI floor applies to Phillip because of his age .So Phillip's medical expense deduction is as follows:
Qualifying medical expenses ($15,000 + $14,000)$29,000
Less: 7.5% × $100,000 (AGI)(7,500)
Deductible medical expenses $21,500

Question 15

During 2014,Nancy paid the following taxes:  Nancy sold her personal residence on June 30,2014,under an agreement in which the real estate taxes were not prorated between the buyer and the seller.What amount qualifies as a deduction from AGI for 2014 for Nancy?

Accepted Answer

[(121 days/184 days × $5,250)+ $430 + $3,500] = $7,382.Nancy chooses to claim a deduction for the (higher)state sales tax rather than the state income tax (assuming this option is available in 2014).

Question 16

Brad,who uses the cash method of accounting,lives in a state that imposes an income tax (including withholding from wages).On April 14,2014,he files his state return for 2013,paying an additional $600 in state income taxes.During 2014,his withholdings for state income tax purposes amount to $3,550.On April 13,2015,he files his state return for 2014 claiming a refund of $800.Brad receives the refund on June 3,2015.If he itemizes deductions,how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2014 (filed in April 2015)?

Accepted Answer

Brad is a cash basis taxpayer.His deduction is limited to the amounts paid in 2014.The $800 refund is reported as income in 2015 under the tax benefit rule.Brad's state income tax deduction for 2014 is determined as follows:
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Question 17

Barry and Larry,who are brothers,are equal owners in Chickadee Corporation.On July 1,2014,each loans the corporation $10,000 at an annual interest rate of 10%.Both shareholders are on the cash method of accounting,while Chickadee Corporation is on the accrual method.All parties use the calendar year for tax purposes.On June 30,2015,Chickadee repays the loans of $20,000 together with the specified interest of $2,000.How much of the interest can Chickadee Corporation deduct in 2014?

Accepted Answer

Chickadee Corporation can deduct interest expense of $2,000 in 2015 and $0 in 2014.Under § 267,Barry and Larry are regarded as related to the corporation.Consequently,the deductibility must await actual payment (in 2015).

Question 18

Byron owned stock in Blossom Corporation that he donated to a museum (a qualified charitable organization)on June 8 this year.What is the amount of Byron's deduction assuming that he had purchased the stock for $10,500 last year on August 7,and the stock had a fair market value of $13,800 when he made the donation?

Accepted Answer

If ordinary income property is contributed to a qualified charitable organization,the deduction is equal to the fair market value of the property less the amount of ordinary income that would have been reported if the property were sold.In most instances,the deduction is limited to the adjusted basis of the property to the donor.Since he had not held the property long enough to meet the long-term capital gain requirement .

Question 19

Quinn,who is single and lives alone,is physically handicapped as a result of a diving accident.In order to live independently,he modifies his personal residence at a cost of $30,000.The modifications included widening halls and doorways for a wheelchair,installing support bars in the bathroom and kitchen,installing a stairway lift,and rewiring so he could reach electrical outlets and appliances.Quinn pays $200 for an appraisal that places the value of the residence at $129,000 before the improvements and $140,000 after.As a result of the operation of the stairway lift,Quinn experienced an increase of $680 in his utility bills for the current year.Disregarding the percentage of AGI limitation,how much of the above expenditures qualify as medical expense deductions?

Accepted Answer

Quinn,who is physically handicapped,modified his residence so he could live independently.Therefore,the $30,000 cost of the improvements is not reduced by the $11,000 ($140,000 - $129,000)increase in the value of the house.The additional operating expenses of $680 are deductible as a medical expense.The $200 appraisal fee is not deductible as a medical expense,but rather as a miscellaneous itemized deduction subject to the 2%-of-AGI floor.Therefore,$30,680 ($30,000 + $680)qualifies as medical expenses.

Question 20

Emily,who lives in Indiana,volunteered to travel to Louisiana in March to work on a home-building project for Habitat for Humanity (a qualified charitable organization).She was in Louisiana for three weeks.She normally makes $500 per week as a carpenter's assistant and plans to deduct $1,500 as a charitable contribution.In addition,she incurred the following costs in connection with the trip: $600 for transportation,$1,200 for lodging,and $400 for meals.What is Emily's deduction associated with this charitable activity?

Accepted Answer

Emily cannot deduct the estimated value of $1,500 of her contributed services.However,she can deduct out-of-pocket costs of $2,200 ($600 for transportation,$1,200 for lodging,and $400 for meals).

Quiz 10: Deductions and Losses: Certain Itemized Deductions

Your friend Scotty informs you that he received a "taxfree" reimbursement in 2014 of some medical expenses he paid in 2013.Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income?

Pedro's child attends a school operated by the church the family attends.Pedro made a donation of $1,000 to the church in lieu of the normal registration fee of $200.In addition,Pedro paid the regular tuition of $6,000 to the school.Based on this information,what is Pedro's charitable contribution?

In 2014,Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family.In addition,he contributes $3,400 to a Health Savings Account.Which of the following statements is true?

During 2014,Nancy paid the following taxes: Nancy sold her personal residence on June 30,2014,under an agreement in which the real estate taxes were not prorated between the buyer and the seller.What amount qualifies as a deduction from AGI for 2014 for Nancy?

Quiz 10: Deductions and Losses: Certain Itemized Deductions

Brad,who would otherwise qualify as Faye's dependent,had gross income of $9,000 during the year.Faye,who had AGI of $120,000,paid the following medical expenses in 2014:

Your friend Scotty informs you that he received a "tax­free" reimbursement in 2014 of some medical expenses he paid in 2013.Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income?

Pedro's child attends a school operated by the church the family attends.Pedro made a donation of $1,000 to the church in lieu of the normal registration fee of $200.In addition,Pedro paid the regular tuition of $6,000 to the school.Based on this information,what is Pedro's charitable contribution?

In 2014,Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family.In addition,he contributes $3,400 to a Health Savings Account.Which of the following statements is true?

During 2014,Nancy paid the following taxes: Nancy sold her personal residence on June 30,2014,under an agreement in which the real estate taxes were not prorated between the buyer and the seller.What amount qualifies as a deduction from AGI for 2014 for Nancy?

Your friend Scotty informs you that he received a "taxfree" reimbursement in 2014 of some medical expenses he paid in 2013.Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income?